Reforming the US Mortgage Market Through Private Market Incentives

Government-sponsored enterprises (GSEs, Fannie Mae and Freddie Mac) are unsustainable—the expected costs they create for U.S. taxpayers far exceed their expected benefits. The question is then how to reorganize the U.S. mortgage market in the absence of GSEs. This paper focuses on a specific mortgage market reform proposal to abolish the GSEs and substitute privative market incentives for mortgage originators, securitizers, and investors, while retaining the FHA and HUD programs in support of lower-income and first-time homebuyers. The paper assembles data showing that stable housing and mortgage activity can be sustained with minimal governmental intervention, including data that demonstrate the success of European housing and mortgage markets that operate with little government intervention.